New Delhi, April 23: In a determined effort to fight the high incidence of loans from unorganised and informal sources in both rural and urban India, Finance Minister P Chidambaram today said that his ministry will take up with the Reserve Bank of India (RBI) the issue of resuming licensing of Local Area Banks (LABs). These banks were started to meet credit needs in rural and semi-urban areas. Chidambaram, who was addressing the consultative committee attached to the Finance Ministry, had conceived LABs as a means of providing an organised source of finance for rural India in place of traditional and unorganised funding sources.

A decade ago, as finance minister in the the United Front government (1996-98), Chidambaram had announced setting up of LABs in his Budget. In August 1996, the RBI allowed the establishment of new local banks in the private sector to encourage rural and semi-urban savings and to provide institutional credit for viable economic activities in local areas. Five LABs have been established since then.

The central bank stopped giving new licenses to Local Area Banks in 2003 on the basis of recommendations by its group, which said there were structural infirmities in the concept. The group had pointed out several weaknesses in the Local Area Bank model, particularly with respect to size, capital base and inherent inability to absorb the losses in the course of business.

The group also suggested measures to enable LABs to grow on healthy lines. These measures include strengthening of capital base, increase in capital adequacy requirement, and prohibition of agent engagement for achieving business outreach.

The consultative committee meeting discussed the C Rangarajan committee report on financial inclusion. Chidambaram pointed out as in case of most other indicators of development, there are variations in the level of financial inclusion across regions, occupations and social groups.

The southern region has registered a far higher level of financial inclusion followed by the West, North and North-eastern regions of the country, he observed. While Puducherry is the first Union Territory (UT) to have achieved full financial inclusion, Palakkad of Kerala is the first district in the country to attain this status.

The finance minister said that six public sector banks have already implemented online submission, appraisal and approval of educational loans and other banks are also in the process of making their educational loan schemes fully online.